On Twitter right now, the hashtag “BitcoinIsBack” is trending as the price of the cryptocurrency has now exceeded $11,000 per Bitcoin. When the price fell from $19,000 to the $3,000 range between December 2017 and December 2018, I was hopeful that this speculative folly would be tossed into the heap for good. Now, we have to deal with the whole group of Twitter users that bought at $3,000-$5,000 in the past year and quickly doubled their money in under a year’s time.
But you know who is not getting in America’s bitcoin craze? America’s rich. Among households with over $1,000,000 in investable assets, only 3% of them own any cryptocurrencies. A little over half their wealth is in stocks, bonds, and operating businesses, a little over a quarter of it is in real estate, about five to ten percent of it is in alternative investments, and the remainder is in cash.
When you review how any sustainable fortunes have ever been made in the history of the United States, the path to success almost always involves owning assets that generate value independent of their trading price.
Own $100,000 in treasuries yielding 5%? Who cares what the price of the bonds are as long as you get to collect your $5,000 each year. Own a piece of real estate that you rent out for $1,500 per month? It doesn’t matter whether you can sell it to a buyer for $150,000 or $200,000–you have a source of ongoing income. Same thing with those operate their own business or own passive shares in the likes of Coca-Cola, Johnson & Johnson, or Nestle. Providing value, and collecting a profit on it, and doing something intelligent with the surplus, is the way to wealth.
Broadly, I am concerned that people don’t understand what they own when they make an investment and they are going to be disappointed when the tide turns.
A single bitcoin can never be more than it is. In fact, due to built-in modest inflation in the supply of bitcoin, it will actually be .97x of a Bitcoin before long and then .91x of a Bitcoin in the year that follows. In that sense, it is worse than an ounce of gold that will always be an ounce of gold.
Unfortunately, the people who are suckered into “investing” in Bitcoin are those in their 20s and 30s who have the highest opportunity cost for each investment dollar that they possess. Someone who sinks $10,000 into Bitcoin could very well end up with nothing or near nothing a decade from now. But the cost of such an action is not just $10,000. What is lost is all the thousands and thousands of dollars in appreciation, dividends, rents, and interest that the $10,000 could have generated if it were allocated to a productive asset from the start.
To that end, I think it is important to point out that the seeming groupthink on Twitter that enthusiastically endorses investing in Twitter is not at all emblematic of how those with serious money behave. America’s rich are not falling for Bitcoin; it is purely an investment bubble limited to young men in the tech and finance industries with high salaries that are not being translated into durable wealth.
I remember reading articles from 1999 when people were investing Beanie Babies under the auspices that it would become a collector’s item decades later. I found it hard to understand why people would do that when they could have just bought a ten-year U.S. government bond yielding 7% and collected $7,000 over ten years on a $10,000 initial investment with esssentially no risk. The answer is that people treat the latest price upticks as a sign of more value to come.
It doesn’t help that financial institutions like JP Morgan and Goldman Sachs are in the process of launching cryptocurrency index funds that aggregate a basket of cryptocurrencies and market them as an investment. Heck, JP Morgan is launching its own cryptocurrency called “JPM Coin.” There may not be a fiduciary duty to refrain from doing it, but the financial world would be a better place if financiers refused to create products that they wouldn’t sell to a parent or child. There should be some ways of making money that America’s leading banks are morally above.
The opportunity cost of all this is staggering to me. Warren Buffett once remarked that investing in a gas station that failed cost him $2 billion over time because it was a lot of money that he lost while young that could have been put to a productive use. Someone out there bought $19,000 in Bitcoin last year. If put into an S&P 500 index fund and held for a working career, that money would represent $700,000 in future wealth. To the extent it is invested elsewhere and a loss sustained, the cost of ignorance and hubris will never be explicitly noted on a household balance sheet but will nevertheless represent what could and should have been.
At a minimum, today’s bitcoin investors should take note that they are making a mistake that America’s rich are not. Perhaps that can serve as motivation to avoid the folly before the real consequences arrive.